College officials insist fraud artists aren’t driving the rise in student loan default rates. But they are a symptom of an increasingly intractable problem: The national push to get more and more people to pursue higher education is populating these institutions with more people who can’t — or won’t — pay their student loans.
A Dayton Daily News examination found several area schools would risk losing eligibility for federal aid if new rules designed to hold colleges and universities more accountable for their loan defaults were in place today.
Under the rules, due to take effect in 2014, the U.S. Department of Education will use three-year default rates when considering eligibility for federal aid. Schools with a default rate above 30 percent for three years would risk getting ousted from the student aid program, essentially a death notice for a school.
Three area schools — Lincoln, Kaplan College and Central State University — would have default rates above 30 percent if the tougher standards were in place today, according to the Daily News examination. Two other schools, Miami-Jacobs Career College and the Dayton School of Medical Massage, are close to the cap, while another three — Wilberforce University and Sinclair and Clark State community colleges, are nearing 20 percent of students in default over a three-year period.
Scott Shaw, chief administrative officer for Lincoln, acknowledged that some students who enroll at the downtown Dayton school are not “committed to education.” Although Shaw doesn’t think “check babies” are responsible for the school’s high default rate, he said the school is doing more to instruct students about their financial responsibility.
“We are making sure they are fully committed to repaying their loans,” he said.
Kevin Kinser, a professor who studies for-profit colleges at the State University of New York-Albany, said schools are required to have stopgaps in place to prevent fraud.
The new regulations, which are clearly aimed at reining in the for-profit industry, are designed to better protect both students and taxpayers, he said.
“For the first time, it puts a specific requirement on an institution to be concerned with the economic outcome of the student,” Kinser said.
College loans approach $1 trillion
The new rules come as enrollment booms — particularly in the for-profit industry — and a growing number of students qualify for taxpayer-backed student loans. Last year, college loans surpassed outstanding credit card debt, and are approaching $1 trillion.
The default rate for 2009 was 8.9 percent, nearly two points higher than the year before, according to draft data released by U.S. Department of Education.
For-profit colleges account for nearly half of all defaults while representing 27 percent of borrowers and just 12 percent of total college enrollment, federal data shows. The number of for-profit students not repaying their loans jumped 49 percent between 2008 and 2009, to 155,211 students in default.
Across all sectors of higher education, 15.2 percent of for-profit students were in default compared to 7.3 percent of public college students and 4.7 percent of students in private schools, the federal data shows. In all, 327,669 students defaulted in 2009, up from 238,852 in 2008.
Students get financial aid in a variety of ways depending on their eligibility. Federal Pell Grants, loans and other assistance first go to pay tuition and fees, but students often can borrow additional money to cover the costs of books, housing and living expenses.
For-profit officials say their schools’ default rates are high because they serve non-traditional students who are older, have families and often are low-income. They also say they are required to offer loans to students who qualify under federal rules.
“Our default rates are higher because our students are typically underserved working adults with limited financial means and no financial support from their parents,” said Michele Mazur, a spokeswoman for Kaplan College.
But critics of the schools say the increasing number of students not repaying their loans is evidence that some for-profits prey on low-income people, saddling them with debt for degrees that don’t lead to careers.
“It adds to the impression that the education is not worth the price students are paying for it,” Kinser said of the default rates. High defaults “may speak to quality,” he said. “You likely have a growing number of students entering for-profits who are not graduating.”
Interviews with about a dozen Lincoln College of Technology students found many with doubts about the value of the education they were receiving. Students like Phoenix Johnson, who studies medical administration technology, complained about poorly prepared teachers, out-of-date equipment and constantly changing requirements. “We signed our life away to the devil,” Johnson said.
But Katelyn Williams, a phlebotomy student at Lincoln, said she was happy with the education she was receiving.
“This school is not bad, it’s just more expensive,” she said.
Tuition at Lincoln this year is $11,750, up 11.9 percent from the 2009-10 school year. The school received $7.7 million in federal student loans last year, according to the U.S. Department of Education.
Shades of mortgage crisis?
The increase in defaults has some experts seeing correlations with the subprime mortgage crisis, triggered by buyers taking out loans they could never realistically hope to repay.
Mark Kantrowitz, a leading financial aid analyst who publishes the website Finaid.org, said while there are parallels with the housing bubble, the relationship is “superficial.” Even with rising defaults the government still profits from making student loans and students who default won’t lose large assets like a home, he said. Student loans are difficult to discharge though, even in bankruptcy, and both wages and tax returns can be garnished to recover loan debt.
“There are elements there, but I don’t see any kind of catastrophic bursting of a bubble,” Kantrowitz said.
Taxpayers are on the hook if students default, which is one of the reasons the federal government imposed its “gainful employment” rule.
Currently, colleges are barred from federal student-aid programs if their two-year default rate is 25 percent or higher for three successive years, or above 40 percent in a single year.
The switch to three-year default rates — which keeps the 40 percent threshold for a single year but also puts schools in jeopardy of losing financial aid if their three-year average is above 30 percent — is designed to make schools more accountable for their loan default rates. But institutions whose mission is to serve low-income and high-risk college students say it puts them at a disadvantage. Students at these institutions often already have financial shortfalls, so losing eligibility for federal aid would close the doors of college for many, they say.
“It would be devastating,” said Phyllis Jeffers-Coly, dean of enrollment management at Central State. The Greene County school, a historically black university where more than 80 percent of the students qualify for federal Pell grants, is increasing student counseling and plans to hire an outside firm to help it come into compliance with the tightening federal rules.
“I understand the department is attempting to raise the bar of accountability for all of us,” Jeffers-Coly said. “However you have to look at the fact that middle class kids have an easier time navigating the college process than first-time students.”
For-profits facing mounting pressure
Student loan defaults reached a high-water mark in the late 1980s, prompting a series of reforms that allowed governments to seize income-tax refunds and carry out more aggressive collection measures. After a steady decline, default rates began rising again as the recession hit.
College dropouts, regardless of where they go to school, have higher default rates than those who receive their diplomas. But students who leave for-profit colleges without a degree tend to default at much higher rates than their counterparts at private and public colleges.
A recent study by the Institute for Higher Education Policy found half of students who dropped out of two-year for-profit schools, and 30 percent of those who attended four-year for-profits, defaulted — twice the rate for students who failed to graduate from public and private schools.
Facing mounting pressure, for-profit schools are becoming more aggressive about reducing their loan defaults. Kaplan, Miami-Jacobs and the University of Phoenix, for example, are only accepting students after they pass a provisional enrollment period.
“We have worked hard on these initiatives; we know that they have had a positive impact,” said Ned Snyder, Miami-Jacobs campus director.
Ultimately, though, it is the students who have to repay the loans, and school officials say there is only so much counseling and education they can do to make that happen.
“There are so many factors beyond any schools’ control as to whether or not a student defaults,” said Kathy Klay, director of financial aid for Clark State Community College. “Ultimately we can’t control the economy.”
Contact this reporter at (937) 225-2342 or cmagan@DaytonDailyNews.com.
About the Author